Junk Bond Yields on Verge of Falling Below 6%

By Michael Aneiro

Early this year the high-yield market’s average yield made a rare, brief foray below the 7% barrier, which had reliably held up throughout market history as a floor for yields before investors stopped buying. Then yields reliably rose. But in May it happened again. And then all of a sudden yields fell below 7% in August and have stayed there for months.

So new and abnormal is the “new normal” of bond investing in today’s zero-rate world that the average junk bond yield is now within a Ben Bernanke beard hair’s breadth of crossing below the 6% threshold, which just a few months ago (and forever before that) would have been unthinkable. The average yield on the Bank of America Merrill Lynch High-Yield Master II Index, a widely followed benchmark, fell to 6.012% at day-end Tuesday. The same average yield began the year at 8.24%.

That decline in yield accompanied a rise in price from 98.1 cents on the dollar to a current record-high 104.5 cents on the dollar, above the key call-constrained 103-cent level that’s also served as a reliable historical limit – until this year.